Why the poor do better on these simple tests of financial common sense

A wallet containing cash and a Visa card is displayed in Surfside, Fla. (AP/Wilfredo Lee)

If you spend all your time thinking about money, chances are, you're going to get pretty good at thinking about money. Indeed, new research suggests that the poor -- for whom concerns about cash are inescapable -- are not as prone to certain financial mistakes often made by the affluent.

"The poor spend a lot more time on mundane, everyday expenses. They're focused on money," said Anuj Shah, a psychologist at the University of Chicago and one of the authors of the research, which was published last year and presented earlier this month at the American Economic Association's annual meeting.

The group's findings are an interesting caveat to the conventional wisdom about poverty. Conservative experts on poverty often argue that it is a result of personal failings and bad choices, including financial choices, on the part of the poor. The liberal counterargument is typically that poverty itself causes intense stress that impairs sound decision-making.

Shah's collaborators on this project, Princeton University psychologist Eldar Shafir and Harvard University economist Sendhil Mullainathan, have produced compelling evidence for the liberal view. Their latest work, by contrast, suggests that poverty actually forces people to become better with money, at least in some respects.

"Having to focus on everyday expenses is an exhausting thing," Shah said. Yet perhaps because of that focus, Shah and his colleagues found that the poor performed better on tests they administered to participants in a series of studies.

The tests are designed to manipulate people's perceptions of how cheap or expensive something is, and to determine whether they can price things consistently and accurately. You can try a few of these tests for yourself below.

Extreme couponing

We'll start easy. Here's the first question.

You're shopping for an iPad. Just when you think you've picked one out, the clerk lets slip that the same model is $50 cheaper at another big-box retailer. That other store is half an hour's drive away. If the iPad costs $1,000, is it worth going to save $50? What if the device costs $500? $300?

Take a minute to think about it.

Most people are more likely to say that the drive is worth $50 if the device costs $500 or $300, rather than $1,000. That's irrational, though. The value of $50 doesn't change because you are spending more or less on some fancy new tablet. Fifty bucks is 50 bucks.

In fact, it might make even more sense to drive for a half-hour to save the money if the tablet is more expensive, since you'll be more strapped for cash after buying it. Once you've dropped $1,000 on your new iPad, you might find you need that $50.

People get the question wrong, though, because they don't have a clear idea of how much $50 is really worth. They use the full price of iPad as a point of comparison, and if the device costs $300 instead of $1,000, the savings of $50 appears relatively more valuable.

This is exactly the kind of thinking that Shah and his colleagues aimed to reveal. They wanted to know whether people relied on comparisons to make sense of prices, determining how much some amount of money was worth in comparison to some other amount, or whether people had a clear and consistent sense of the value of a dollar.

The affluent are slightly more susceptible to misleading, comparative perceptions of price. Shah conducted a nationally representative survey and found that among respondents with above-average incomes, 71 percent said they would make the trip to save $50 on a tablet that cost $300, and just 51 percent said they would if the tablet cost $1,000.

That's the kind of mental error that many Americans just can't afford. Participants with below-average incomes made the mistake, but with less frequency the less they earned. Seventy percent said they would be willing to drive to get the discount when the tablet cost $300, and 55 percent said they would do so when the tablet cost $1,000.

Rolling the dice

Here's another one.

Your buddy wants to make you a bet. He is going to roll two dice, and if the total number of spots facing up after he rolls is seven or twelve, he'll pay you $9. Is it a bet?

That was intentionally confusing. Let's make things a little clearer.

Your buddy wants to make you a bet. He is going to roll two dice, and if the total number of spots facing up after he rolls is seven or twelve, he'll pay you $9. If he rolls any other number besides seven or twelve, you will pay him 5 cents. Is it a bet?

In the first version, your friend was offering you a bet in which you had no chance of losing anything. It's a bet you should always take. In the second version, you do have a chance of losing 5 cents. You should take the bet, but it's not as good a bet as in the first version.

Yet when shown just one of these two versions, people are more likely to accept the second bet. It could be that many people have a hard time thinking about winning $9 when they have nothing to which to compare it. The chance of losing a nickel causes them to see $9 as a relative large amount of money, and they feel that the bet is worth taking.

Once again, less affluent participants did better on this test in Shah's study.

Lower-income participants who read the first version were more likely to say that the gamble was attractive than were those in the high-income group; however, the opposite was true of the second version.

Beer on the beach

This last one is a little more relatable.

You're at a remote beach with your friends. It's sweltering out, and thinking out loud, you say how much you'd like an ice-cold bottle of beer. One of your friends was thinking the same thing, and she offers to pick you up a bottle of Coors from a weathered little grocery store on the other side of the dunes, which happens to be the only place nearby where beer is sold. You open up your wallet, hand your friend a $10 bill and tell her to bring you the change.

Being an economist, your friend hesitates and asks you what's the most you would be willing to spend for a bottle of Coors. Although you gave her a $10 bill, she's not going to spend $10 if that's how much the store is charging. What's your price? If the beer is that amount or less, she'll buy it, and if not, she'll bring you your money back.

There is no wrong answer here. That said, what if, instead of a weathered little grocery store on the other side of the dunes, the beer is being sold at an exclusive five-star hotel with a commanding view of this picturesque, isolated lagoon?In that case, would you be willing to pay a little more for a Coors?

What if there is no licensed retailer, just a bunch of dudes with a cooler full of Coors? How much cash would you be willing to offer them?

However much you said you'd shell out at first, you should be prepared to pay no more and no less regardless of who's selling the beer. A bottle of Coors is a bottle of Coors. It doesn't taste any better if you buy it at a bar in a hotel, so you shouldn't agree to pay a steeper price for it.

To be clear, the beer would probably be more expensive if you bought it at a hotel. The patrons of that sort of establishment are more affluent and can afford higher prices, allowing the bar to charge more.

That isn't relevant here, though. Your friend, the economist, didn't ask you what you thought a fair price for the beer would be, but how much you'd be willing to spend on it at most. If you're fabulously rich, that amount might be pretty large, but in any case, it shouldn't change depending on who's selling the beer.

Shah and his colleagues conducted a survey asking this question of a sample of respondents representative of the country as a whole. Those who weren't as well off did better.

Those whose incomes were above average said they were prepared to pay $6.80, on average, for the beer at the resort, and just $5.46 for the beer at the grocery store. Those in the low-income group were willing to pay $6.21 at the resort and $5.71 at the grocery store.

These results don't necessarily show that the poor are better with money in practice. Managing personal finances effectively in the real world involves reading plenty of fine print. If you didn't receive a good education, or if working a second job leaves you with no time to do the research, all of that is much harder.

Shah's collaborators have shown that worrying about money makes it more difficult for people to complete puzzles that have nothing to do with money. Other research suggests that when people lose money, they become more focused on the short term, even to the detriment of their long-term finances.